First Internet Bancorp annual report, FY2022

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First Internet Bancorp — 2022 Form 10-K

Business context and period. This annual report covers the fiscal year ended December 31, 2022; it does not provide standalone fourth-quarter results. First Internet Bancorp is an Indiana-based financial holding company operating primarily through First Internet Bank of Indiana, a digital bank without traditional branches. It serves commercial, small-business, consumer and municipal customers. At year-end, it reported $4.54 billion in assets, $3.44 billion in deposits and $365.0 million in shareholders’ equity.

Financial results and condition

  • Profit: Net income was $35.5 million, or $3.70 diluted EPS, versus $48.1 million, or $4.82, in 2021. Pretax income was $40.1 million; income tax expense was $4.6 million, an 11.4% effective tax rate.
  • Interest income and margins: Net interest income rose 12.2% to $97.1 million. Net interest margin increased to 2.41% from 2.11% (2.54% versus 2.25% on a fully taxable-equivalent basis). Average earning-asset yield rose to 3.89% from 3.27%, while the cost of interest-bearing liabilities rose to 1.63% from 1.28%.
  • Other income and expenses: Noninterest income fell 35.3% to $21.3 million, primarily as mortgage banking revenue declined to $5.5 million from $15.1 million and the prior year included a $2.5 million premises-sale gain. Noninterest expense increased 18.6% to $73.3 million, including higher premises, employee and loan expenses.
  • Loans and credit: Total loans increased 21.2% to $3.50 billion. Commercial loans were $2.72 billion (77.7% of the portfolio); consumer loans rose 56.0% to $733.3 million. Nonperforming loans were $7.5 million, or 0.22% of loans, versus 0.26% a year earlier. The allowance for loan losses was $31.7 million, 0.91% of loans; provision expense was $5.0 million and net charge-offs were $1.1 million.
  • Deposits, liquidity and funding: Deposits increased 8.3% to $3.44 billion. Brokered deposits rose to $578.8 million from $299.4 million, while certificates of deposit declined. Cash and cash equivalents were $256.6 million; available-for-sale securities were $390.4 million. Management reported $473.9 million of additional borrowing capacity and stated liquidity was sufficient for at least 12 months. Outstanding FHLB advances were $614.9 million, up from $514.9 million; subordinated debt principal was $107.0 million.
  • Cash flow: Operating activities provided $82.7 million; investing activities used $601.0 million, driven in part by loan growth and loan purchases; financing activities provided $331.9 million, including deposit growth and increased FHLB advances. Cash and cash equivalents decreased $186.4 million to $256.6 million.
  • Capital and shareholder returns: The company and Bank met well-capitalized requirements. Consolidated CET1 was 10.93%, total capital 14.75% and leverage 9.06%. Total equity declined 4.0% to $365.0 million, reflecting repurchases and a larger accumulated other comprehensive loss. The company declared $0.24 per share in dividends and repurchased $27.8 million of stock during 2022.

Material changes versus 2021

  • Net income decreased $12.6 million, mainly due to lower noninterest income, higher operating expenses and a larger loan-loss provision; the increase in net interest income and lower tax expense partly offset those items.
  • Loan growth was strong, particularly in franchise finance, residential mortgage, construction and single-tenant lease financing. Healthcare finance balances declined following the acquisition of its former origination partner, Provide.
  • Rising rates boosted asset yields and net interest margin but increased deposit costs and reduced the fair value of securities. Accumulated other comprehensive loss increased to $33.6 million from $11.0 million.
  • Operating cash flow increased to $82.7 million from $54.8 million, while cash and cash equivalents fell from $443.0 million to $256.6 million.

Outlook, risks and unusual items

  • Consumer mortgage exit: In the first quarter of 2023, the company decided to exit its consumer mortgage business, including its digital direct-to-consumer platform and local consumer mortgage and construction-to-permanent lending. It expects approximately $6.8 million lower annual noninterest expense and approximately $2.7 million higher annualized pretax income; 80% of the benefit is expected in 2023 and all of it thereafter. Estimated pretax exit costs are approximately $3.3 million in the first and second quarters of 2023. Commercial construction and land development lending is not included in the exit.
  • Interest-rate exposure: Management identifies deposit repricing, margin pressure and securities valuation as key sensitivities. Its static-balance-sheet model estimated that an immediate 200-basis-point increase would reduce year-one net interest income 16.08% and economic value of equity 36.47% versus the modeled base case; actual results may differ and depend on assumptions and management actions.
  • Credit and implementation risks: The filing highlights commercial and real-estate credit concentrations, local economic exposure, and the uncertainty of borrower and collateral performance. The company expected CECL adoption in 2023 to increase the loan allowance by $2.5–$3.0 million and the allowance for unfunded commitments by $2.5–$3.0 million; actual adoption impacts could change.
  • Funding and operations: Risks include deposit competition and reliance on wholesale funding, cybersecurity and third-party service providers, regulatory requirements, and the transition from LIBOR benchmarks on certain debt and hedges. The Bank’s $485.4 million in loan commitments and $639.0 million in deposits due within one year are also relevant to funding needs.
  • Other disclosures: The company reported no material legal proceedings. The auditor issued unqualified opinions on the financial statements and internal controls; the allowance for loan losses was identified as a critical audit matter.

Most important facts for investors to verify

  • Whether loan and deposit growth can be sustained without materially raising credit losses or funding costs, particularly as brokered deposits and FHLB borrowings increase.
  • How quickly deposit rates reprice relative to loan and securities yields, and how actual results compare with management’s interest-rate sensitivity assumptions.
  • Credit trends in commercial real estate, small-business lending and other concentrated loan segments; review the allowance, nonaccrual loans and new SBA-related problem loans.
  • Whether the mortgage-business exit achieves the stated expense and pretax-income benefits after the estimated $3.3 million exit costs.
  • The realized CECL transition adjustment and its effect on allowances, retained earnings and regulatory capital.
  • The scale and persistence of unrealized securities losses and their effect on equity, alongside the company’s liquidity and capital capacity for dividends and repurchases.